Celebrating 150 Years of Mind, Metal and the Human Spirit

Jim Woods

Jim Woods has over 20 years of experience in the markets from working as a stockbroker, financial journalist, and money manager.

This week, America has a chance to celebrate an anniversary that I suspect not a lot of people even know about. I admit that I didn’t really know about it until recently, and I’m a big fan of these kinds of industrial celebrations. In two days, the nation will mark the 150-year anniversary of the completion of the Transcontinental Railroad on May 10, 1869.

The “Golden Spike” event will happen this Friday in Utah, and to help commemorate the occasion, Union Pacific Corporation (UNP) is sending its historic steam locomotive “Big Boy No. 4041” to the event. The train will be making a few stops in Utah over the next few days to help the state celebrate the event where it all happened a century and a half ago.

Now, you may think this event is just a quaint little remembrance of things past or a nostalgic reminder of the country’s expansion into the West. But I don’t think of it that way. I think of it as a chance to celebrate reason, reality and the victory over matter and molecules in the pursuit of a concrete physical goal — a goal to explore and settle new territory and to enhance human existence.

Because you see, that’s what is at the essence of an achievement such as the Transcontinental Railroad.

Imagine the feat of engineering, human capital, financial capital, intellectual capital and hard physical and mental labor it took to lay railroad ties across the entire country. If you’ve ever been on a long drive throughout the desert part of the Western United States, you know how rather inhospitable it is. Now think of yourself with no Global Positioning System (GPS), no air conditioning, no roadside cafés — indeed, no roads at all. Then think of yourself trying to figure out how to build something as grand as a transcontinental railroad.

Once you do that, it’s easy to be filled with a sense of awe for reason and the human spirit. I know my heart is swelling with that sense of wonder and reverence even as I write these words.

Yet, when it comes to having reverence for reason and human achievement, there is no better writer than Ayn Rand. In her magnum opus “Atlas Shrugged,” one of the lead characters, Dagny Taggart, is the head of the railroad company Taggart Transcontinental.

In the passage from the novel below, Dagny (She) is riding on the “John Galt Line,” a new railroad built with metal that’s stronger, lighter and better than anything ever produced. It was created by the industrialist Hank Reardon and because of his achievement, Reardon is vilified by the horde of “second handers” who think he is too smart, too proud, too arrogant and too protective of his invention. They would rather denounce it as unsafe, that is, until they need it for their own purposes. Then they want him to give it to society for free and essentially treat him as a slave.

Note Rand’s worship here for human values and human achievement, while also destroying those who regard achievement and the pursuit of values in the physical world as an “ignoble concern” or a “surrender of man’s spirit to his body.”

She looked at the cab around her. The fine steel mesh of the ceiling, she thought, and the row of rivets in the corner holding sheets of steel sealed together — who made them? The brute force of men’s muscles? Who made it possible for four dials and three levers in front of Pat Logan to hold the incredible power of the sixteen motors behind them and deliver it to the effortless control of one man’s hand?

These things and the capacity from which they came — was this the pursuit man regarded as evil? Was this what they called an ignoble concern with the physical world? Was this the state of being enslaved by matter? Was this the surrender of man’s spirit to his body?

She shook her head, as if she wished she could toss the subject out of the window and let it get shattered somewhere along the track.

As I’ve written before, the only antidote to bad ideas are good ideas. And one way to celebrate and remember good ideas in action is to remember achievements such as the completion of the Transcontinental Railroad.

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So, on Friday, I am going to raise a glass and toast the “Golden Spike.” I might even book a trip on an historic rail-car in homage to not only the Transcontinental Railroad, but to Ayn Rand, “Atlas Shrugged,” and all the men and women of genius in the world who deserve our reverence, respect and love.

In the name of the best within us!

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In case you missed it…

Why ‘Average Inflation’ Matters to You

A week ago, May 1, was Fed day, with Federal Reserve Chairman Jerome Powell and the Federal Open Market Committee (FOMC) leaving interest rates unchanged. The Fed did, however, mention something that could be of key importance going forward.

In the Fed’s FOMC statement, officials noted how inflation, after excluding the volatile food and energy categories, was running below the central bank’s 2% target. In his presser following the release of the statement, Chairman Powell did say that the recent softening in inflation was likely to be “transient.”

Yet Powell went on to qualify that if this outlook proved wrong — and the recent weakness in price pressures was persistent — that would be “something we would be concerned about.”

The bottom line here is that the Fed is standing pat for now, and there will be no immediate “precautionary” rate cut as many pundits had speculated. As Powell put it, “We don’t see a strong case for moving [rates] in either direction”.

Yet aside from just a simple rate cut, there is another move the Fed could make that has potentially big implications for equities, bonds and your money. This move is all about what’s known as “Average Inflation,” and this subject is something that my friend, macro-analyst extraordinaire and contributor to my Intelligence Report advisory service Tom Essaye has written brilliantly about.

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Tom is the founder and editor of the Sevens Report, a daily market update and analysis that I highly recommend to all my readers.

Today, I am pleased to present you with a special guest editorial by Tom Essaye on this subject. I think you’ll find it as thought-provoking as I did. — J.W.

Why Average Inflation Matters to You

By Tom Essaye, Editor, Sevens Report

One of the key catalysts that could continue driving markets higher from here is the Fed, and particularly a more-dovish-than-expected Fed. This outcome is, in some ways, more likely than most appreciate.

Now, I’m not talking about the Fed cutting rates. Unless economic data or inflation nosedive from here (and both are unlikely, especially with what’s happening to oil and the positive impact that will have on inflation), the Fed is “on hold” for the remainder of 2019.

However, in June, the Fed could turn more dovish in a different way — one that could have profound implications on the returns of commodities, stocks and bonds over the coming decades — because it’s happened before.

The specific dovish event I’m referring to is the Fed potentially changing its inflation target from a 2% ceiling to a 2% average.

Here’s why that’s important.

The Core PCE Price Index has been under 2% annually for 10 straight years. And last year, as the Core PCE Price Index approached the Fed’s 2% inflation target, the Fed hiked rates four times to stop the ascent. That, in turn, choked off growth in the short term, nearly inverted the yield curve and contributed to a correction in stocks.

But, if the inflation target is set to an average, that likely wouldn’t have happened. Why? Because if it’s an average, then inflation needs to spend time above 2%, which means the Fed will initiate interest rate hikes less frequently as inflation rises. And since inflation has been under 2% for years, it’s conceivable that the Fed could allow inflation to rise above 2% for years to come. Practically speaking, that means a more dovish Fed than we’ve seen in decades.

Here’s what I mean.

In the 1970s and 1980s, the Core PCE Price Index was consistently well above 2%. In fact, the Core PCE Price Index rose above 2.5% year over year in the late 1960s and didn’t drop below that level until the mid-1990s — that’s nearly 30 years of higher inflation!

But in the mid-1990s, the Fed informally adopted a 2%-ish inflation target, and they’ve been very good at hitting that target ever since. In fact, since the mid-1990s, the Core PCE Price Index hasn’t risen above 2.5% year over year. However, with a new “average” inflation target, that likely will change. Here’s why that matters to you.

It means that over the longer term, we could be investing in an era of higher inflation — something no one in the markets has seen since the mid-1990s. And, it’d be a major reversal from the asset allocation strategy that has worked so well for the last 25 years.

When inflation is low (1995-Present) that’s good for 1) Bonds, 2) Stocks (mostly) 3) Consumers (via low interest rates) and it’s bad for 1) Commodities and 2) Hard Assets. But, when inflation is high, the biggest loser is bonds — so this move could represent a material change in different asset class performances going forward.

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When inflation is higher (2020?) that’s good for 1) Commodities, 2) Hard Assets (Real Estate and “Stuff”), 3) Stocks (but it increases their volatility) and it’s bad for 1) Bonds and 2) Cash.

Bottom line, there are increasing signs the Fed is willing to let inflation run higher than at any time in the past 30 years. That potential change could be longer-term positive for hard assets and stocks and longer-term negative for bonds and fixed income. This could be an important development, given the impending retirement of millions of baby boomers who are about to start relying on fixed income.

What’s Next?

The Fed’s “framework” conference in early June (June 4-5) will be where they discuss an “average” inflation target. I don’t expect any bombshell announcements at this point, but by the end of that conference, we should know 1) Whether the shift to an “average” inflation target is going to happen and 2) The process by which it does happen (it’s going to be a long one as the Fed does nothing quickly unless all hell is breaking loose).

Interestingly, I did not miss the irony of writing this piece about low inflation, because if you’re like me, real inflation (health care costs, tuition costs, property costs, car costs, etc.) is moving well above 2% per year! So, if I were invited to this conference, which of course I will not be, I would urge the Fed not to consider changing its inflation target, but to think about the way it defines inflation instead.

I’d be happy to show them a pie chart of my monthly expenses as a reference point, because the inflation rate of the things I need to pay for (those mentioned above) said bye, bye to 2% a long time ago.

So, I shudder to think what will happen if the Fed decides to let inflation run going forward. Yet, I learned early in this business we must trade the market we’ve got… not the one we wished we had.  — T.E.

Thanks again to Tom for that outstanding analysis. I know I will be keeping a keen eye on the average inflation issue. I will be writing more about that in this publication, and in my newsletters… so stay tuned!

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Happiness and Values

“Happiness is that state of consciousness which proceeds from the achievement of one’s values.”

–Ayn Rand

There is no greater pleasure in life than achieving and expressing one’s values. That’s because real happiness is deeply entwined with what we value most and what’s at the core of our being. If you want to cultivate happiness, align that happiness with the purpose of your life. Because even if you struggle mightily, you will bask in the glow of knowing that it is worth the fight.

Wisdom about money, investing and life can be found anywhere. If you have a good quote that you’d like me to share with your fellow readers, send it to me, along with any comments, questions and suggestions you have about my newsletters, seminars or anything else. Click here to ask Jim.

In the name of the best within us,

Jim Woods

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